State says sales tax still not enough

California may have the nation's highest sales tax, but it's still not generating the revenue it should be to keep up with the state's economic growth.

A report released this week by the state's Legislative Analyst's Office says Californians are spending less on taxable goods, and more on non-taxable services like health care, auto repair and groceries, which have increased in price. That means the state is generating less sales-tax revenue, about half of of which is used for the general fund while the rest is funneled to local municipalities. The average sales tax rate in California municipalities is now 8.4 percent. San Diegans pay 8 percent.

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But it's not the high rate that's causing the drop in revenue - it's that the price of taxable goods in California isn't rising fast enough. Prices for services, which are not taxed, however, have increased 2.5 percent year-over-year faster than goods. That means they're taking up a bigger chunk of income. In 1979, Californians spent 53 cents of each dollar on taxable items. In 2012, they spent 33 cents of each dollar on taxable items.

That's contrary to what analysts expected when they started the research two months ago.

"We thought consumers were buying fewer lawnmowers and, as an alternative, buying more landscaping services," said Chas Alamo, an LAO fiscal and policy analyst who co-authored the study. "Through our research and revenue forecasting, however, we discovered that the decline occurred primarily because prices of services have increased faster than inflation and prices of taxable goods have increased slower."

If people in the state in 2012 bought taxable goods at 1979 levels, California could have charged 5.2 percent sales tax and generated the same revenue it actually did in fiscal 2012. Last year, the state generated $43 billion in sales-tax revenue, at an average rate of 8.4 percent. If Californians were spending at 1979 levels at 8.4 percent in fiscal 2012, the state would have brought in $67 billion in sales-tax revenue.

The LAO doesn't expect the trend to change at least in the next decade. That's because an aging baby-boomer population will require more health care; prices for services such as auto repairs have increased, and because the government subsidizes a lot of industries that lend themselves to services (such as a pre-tax spending on health insurance and the mortgage-interest tax deduction).

"Absent further increases in the sales tax rate or expansion of its base, sales tax revenue for the state and local governments are likely to grow slower for at least the near future," the report concludes.

Alan Gin, economist at the University of San Diego, said he wasn't surprised by the study’s findings, noting that the U.S. economy has become more service oriented.

The Bureau of Economic Analysis reports that services made up 40 percent of personal consumption in the 1940s. That jumped to 54 percent in 1980. In 2012, services were up to 66 percent of personal consumption.

Gin said a potential tweak to help generate more revenue would be charging taxes on services considered luxuries, such as hair styling, massages, and exercise classes.